World has not escaped risk of collapse

German Chancellor Angela Merkel (right) speaks with Klaus Schwab, founder of the World Economic Forum, during the opening session in Davos in January 2012.File

The world has not yet escaped the risk of a collapse in the global economy despite some renewed confidence heading into 2013, the founder of the World Economic Forum (WEF) told The Associated Press on Monday.

Swiss economist Klaus Schwab, speaking on the eve of the elite annual gathering in the Swiss mountain resort of Davos, called for the business and government leaders heading there to focus on "cautious realism" and a recovering public trust to avoid another major financial crisis.

"The problems and the risks have not gone away," he said in an interview. "The world economy may still confront a collapse if very negative constellations occur."

Markets started strongly this year, with many stock indexes near multi-year highs, and the euro currency union no longer seems in danger of breaking apart. Throughout 2012, the world's central banks have flooded financial systems with new money.

But unemployment remains high in many developed economies and the public's faith in business and government leaders is falling. The euro alliance and Japan are in recessions. And politicians in the United States (US) are struggling to finalise a budget deal to avoid a potential default that would cause havoc in financial markets. Even if the US does reach a deal, as expected, it could include big government spending cuts that would hurt the global economy.

Schwab's WEF forum this week is expected to draw more than 2,500 of the world's financial and political elite. Organisers, journalists, political aides and others began streaming in by train and car Monday as a steady snowfall coated the region.

Schwab said economic growth is based on optimism, among both consumers and investors, so the challenge is for leaders "to give people the confidence again to look with more optimism into the future".

However, he said a fundamental problem is that the latest economic recovery is a "jobless growth," where any early improvement in the economy is yet to be felt in the broader job market.

In demand talent and skills

More socially minded entrepreneurship will be needed and young workers entering the job market will need to focus on gaining talents and skills that are most in demand such as new technology and science, Schwab said.

"We need new ways of thinking. It's not the traditional employment which will solve the issue," he said. "I think we have too many sociologists, psychiatrists around, and not enough engineers and scientific people."

Speaking on the same day as President Barack Obama's second-term public inauguration, Schwab said he hopes the world's biggest economic and military power will become more assertive on the world stage.

"What the world expects is that someone, if there's a major crisis, takes the lead, and I'm really hopeful that the United States, with the second mandate, will assume its responsibility as the strongest power," he said.

Asked about Google's cancellation of its annual invitation-only Friday night party, which has been the hottest ticket among celebrities and elites at Davos in recent years, Schwab described it as a sign of the times.

"I think the world is in a very serious situation and the annual meeting is a very serious event. We are not a fun event. We want to improve the state of the world - the world is not in a good shape at the moment," he said. "So I think it's really logical that we concentrate much more on substance."